Global Stocks Rise on Valuations; BP, Air France, Alcoa Advance

By Adria Cimino

Oct. 28 (Bloomberg) -- Stocks around the world as the MSCI World Index traded near the cheapest relative to earnings since at least 1995. The Standard & Poor's 500 Index rebounded from its lowest since 2003.

Alcoa Inc. gained 5.3 percent after the stock traded at the lowest price-to-earnings ratio on record. BP Plc rallied 8.6 percent as Europe's second-biggest oil company said profit rose 83 percent in the third quarter. Volkswagen AG surged as much as 93 percent to become the world's biggest company by market value. Money-market rates extended declines today.

``Valuations are interesting,'' said Vincent Juvyns, a strategist at ING Investment Management in Brussels, which oversees $537 billion. ``Good earnings reports are giving a bit of cheer to the market and allowing investors to look at the fundamentals.''

The MSCI World Index added 3.4 percent to 862.15 at 1:32 p.m. in London, snapping a two-day, 8.4 percent drop. The S&P 500 rallied 2.8 percent.

Europe's Dow Jones Stoxx 600 Index advanced 3.4 percent, with Air France-KLM Group, the region's biggest airline, and SAS Group gaining more than 5 percent as Citigroup Inc. recommended the stocks.

Toyota Motor Corp. climbed 7.8 percent in Tokyo and Hynix Semiconductor Inc. soared 15 percent in Seoul, helping to lift the MSCI Asia Pacific Index 3.6 percent.

More than $12 trillion was erased from the market value of equities this month, accounting for about one-third of the total value wiped off stocks this year, as almost $680 billion of writedowns and losses by banks triggered a freeze in credit markets.

Borrowing Costs

Central banks and governments worldwide have cut borrowing costs and bailed out banks to shore up the financial system. Still, concern that such efforts won't prevent a global recession has pushed stocks lower in October, sending the MSCI World down 28 percent this month. The decline has left the index of 23 developed countries trading at 10.5 times the reported earnings of its companies, near its lowest since 1995 when Bloomberg started following the data.

Money-market rates in London show signs the paralysis among lenders is easing. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell 4 basis points to 3.47 percent today, its 12th straight drop, according to the British Bankers' Association.

The Libor-OIS spread, a measure of cash scarcity, narrowed 5 basis points to 258 basis points today, down from 345 basis points two weeks ago. It was at 87 points before Lehman Brothers Holdings Inc. collapsed last month.

Rate Outlook

Central banks are expected to keep lowering borrowing costs. European Central Bank President Jean-Claude Trichet said yesterday the bank may cut rates next week as the financial crisis damps inflation.

Futures on the Chicago Board of Trade show 100 percent odds the Federal Reserve will reduce its target rate by at least a half-percentage point tomorrow. The chances of a 0.75 point reduction rose to 38 percent from 34 percent yesterday.

The Fed started buying commercial paper yesterday, and in coming weeks it will lend as much as $540 billion to money- market mutual funds. Other cash loans to banks and financial institutions totaled $700 billion last week, up from almost nothing a year ago.

The Treasury, meanwhile, is buying equity stakes in banks as a way to inject capital into the struggling financial system. Nine of the nation's biggest banks may receive $125 billion from the $700 billion Troubled Asset Relief Program as soon as this week, and a growing number of regional lenders have announced preliminary approval to take part in the program.

Alcoa, BP

Alcoa, the largest U.S. aluminum producer, added 5.3 percent to $9.52. A 75 percent drop this year left the stock valued at 4.86 times earnings as of yesterday, the cheapest on record.

BP climbed 8.6 percent to 475.5 pence. Profit rose 83 percent to $8.05 billion in the third quarter as record crude and higher natural-gas prices outweighed production setbacks in Azerbaijan and the Gulf of Mexico.

Excluding one-time items and gains or losses from inventories, profit was expected to climb 62 percent to $6.82 billion, according to the median estimate of 10 analysts surveyed by Bloomberg News.

Earnings for Stoxx 600 companies will decline 5.2 percent in 2008, down from 11 percent growth predicted the start of the year, according to estimates compiled by Bloomberg. Profits for companies in the S&P 500 will drop 6.8 percent, down from 15 percent growth expected at the beginning of the year.

Europe's Stoxx 600 is down 21 percent in October, headed for its biggest monthly decline since the October 1987 crash. The measure closed yesterday valued at 7.9 times profit, the lowest since at least January 2002. The S&P 500 for U.S. equities traded at 18.5 times profit yesterday.

Aviva, Air France

Aviva Plc climbed 15 percent to 281.75 pence. The U.K.'s biggest insurer by assets said its capital reserves are ``strong,'' as it reported a 12 percent increase in life and pension sales in the first nine months of the year, helped by gains in the U.S.

Air France, Europe's largest airline, increased 6.5 percent to 11.08 euros, and SAS Group, owner of Scandinavian Airlines, climbed 5.8 percent to 32.80 kronor. Ryanair Holdings Plc, the region's biggest discount carrier, added 4.2 percent to 2.59 euros.

The carriers' stocks were raised to ``buy'' from ``hold'' at Citigroup, which cited ``record low'' valuations. The Stoxx 600 travel index is trading at 8.3 times earnings, the lowest since at least 2004 when Bloomberg began tracking the data.

ARM Holdings Inc. gained 13 percent to 91.25 pence after the U.K. designer of semiconductors used in Apple Inc.'s iPhone said third-quarter profit jumped 38 percent on record sales.

Volkswagen, Alcoa

Volkswagen soared 47 percent to 765 euros, after touching 1,005.01 euros earlier. The automaker's shares rallied after Porsche SE announced plans to raise its stake in the German carmaker to 75 percent, triggering demand from short-sellers. Porsche said it will increase its holding from 42.6 percent, prompting some short-sellers to buy from a shrinking pool of stock to end their bets.

Toyota, Japan's largest automaker, rose 7.8 percent to 3,170 yen, halting a four-day, 22 percent drop. Hynix, the world's second-biggest memory chip-maker, soared 15 percent to 9,330 won, rebounding from a five-day, 47 percent slump.

British Sky Broadcasting Group Plc gained 3.2 percent to 363.25 pence. The U.K.'s biggest pay-television provider was upgraded to ``buy'' from ``hold'' at Citigroup.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.